OUTR - Outerwall

[elevensecsrt4]

I have watched this company and like others wish they would run this company for cash to shareholders.  Eco atm is a drag for the company with an increasingly competitive landscape for used phones from all angles. Even though the ECO atm in my local walmart almost always has a line of people waiting to use it ( or check price offered for phone).

 

Has anyone heard/read management comment on the new chip card rollout for c-card transactions that had a susposed deadline of october 1st? I glanced at a transcript and didn't see it.

 

I imagine that might affect capex for a company who takes no cash just credit/debit cards?

 

In the Low 60's I hope management is at least buying aggressively.

 

P.S.

 

I have had netflix for over 5 years  prime and hulu for over 1 year and My family still use 1-3 redbox rentals a month for the kids in the car traveling, new releases and monthly occasional chick flix (read when wife is uber emotional)  8)

[DTEJD1997]

hey all:

 

Ecostar is just a massive, massive boondoggle.  They NEVER should have invested in such a harebrained scheme.  They should start shutting it down as fast as reasonably possible.  If there are ANY profitable units, let those run, shutter everything else.  If those profitable units can't support the division...liquidate it or sell it off for a substantial discount.  Let some other company lose the money.

 

I was very surprised to see that the Coinstar division only accounts for 13% of revenue.  I would think this is their best division, and least susceptible to attack.  However, my credit union will count coins for free as long as you deposit the proceeds into an account.  Coinstar is probably for "unbanked" people.  Unfortunately, this is a shockingly large percentage of the population...

 

I think Redbox is a neat thing, and probably has more life left to it than people give it credit for.  I think there could be a good market for renting video games for X-box & Playstation.  Eventually though, this division will start to lose out.  How many people will be renting DVD's in 2020?

 

Interesting company, but the EcoATM scuttles the deal.  The risk is simply too high that management wastes resources on this or some other harebrained scheme.  They should be aggressively returning cash to shareholders instead.

[kab60]

While the two posts above raises some valid points I don't think one should stay away because of ecoATM - I think you exaggerate. The company has taken a 80m impairment (they know it isn't what they expected) and capex has been slashed. There's a new CEO in charge and he shouldn't have a problem writing it off completely but either way it is somewhat insignificant today (but a major waste historically).  The company returns 75-100 pct of FCF to shareholders and FCF should grow with less cash wasted on ecoATM. The only major risk in my mind - and one that is hard to handicap - is another new venture. I think it's difficult for most CEO's to accept their business is shrinking.

[Larry]

Hey, just jumping in here.

 

I have a very small position in Outerwall. Like others here, I dont see Coinstar and Redbox having very bright future, but I think the runway may be longer than people think. But my thesis is pretty much counting on management buying back stock as much as they can. So I think they should just get rid of projects like ecoATM if they clearly dont have any future. But yea its a cheap stock for reason. Allan Mecham's fund is large owner, so I would think they pressure management to do whats right (buybacks) for the shareholders, right? Because I remember reading that his thesis is pretty much dependent on shrinking amount of shares outstanding as well. So its going to be interesting with the new CEO, if they get rid of ecoATM or what. Hopefully they will just repuchase stock as much as they can especially considering the recent drop in share price.

[actuary]

Maybe they repurchased a lot of stock in Q3 given the Q2 net leverage ratio of 1.56x versus their target of 1.75-2.25x. YTD they have only returned 50% of FCF through dividends/buybacks versus their goal of 75-100%. It will be shocking if they didn't repurchase at least $50 million in Q3 and disappointing if not closer to $100 million, but I think this activity would surprise the market for some reason. Guys, am I missing something?

[JayGatsby]

Maybe they repurchased a lot of stock in Q3 given the Q2 net leverage ratio of 1.56x versus their target of 1.75-2.25x. YTD they have only returned 50% of FCF through dividends/buybacks versus their goal of 75-100%. It will be shocking if they didn't repurchase at least $50 million in Q3 and disappointing if not closer to $100 million, but I think this activity would surprise the market for some reason. Guys, am I missing something?

I think that's fair. I thought their plan was ~$250M of FCF, which would mean at least $50M of repurchases a quarter. I've wondered if they anticipated the stock falling after the ecoATM impairment charge and decided to save some extra dry powder. EcoATM capex may end up being less than guidance but wouldn't really change the overall picture. Still 7M shares short and reducing the share count to 17M (~$65M of repurchases) this quarter wouldn't be terribly aggressive. Slate this quarter was almost nonexistent but the comp quarter wasn't too impressive either and they haven't lapped the price increase yet.

[Guest Grey512]

Is it just me or is buying back stock in a fundamentally declining business not a great idea?

 

I get that dividends are not tax-efficient (there are no pretty options here), but still. It's just like the whole community of OUTR-watchers on the long side has agreed that buy-backs are the thing to do here, without any debate.

 

 

[Picasso]

Trust me I debated that dividend versus buyback for a declining business like OUTR for like 5 pages. Abandon all hope ye who enter that debate on this thread.

[Guest Grey512]

Trust me I debated that dividend versus buyback for a declining business like OUTR for like 5 pages. Abandon all hope ye who enter that debate on this thread.

 

Got it. I ignored the Coinstar thread and had a look at some of your posts there. You've expressed some of my concerns regarding the OUTR bull thesis quite well.

 

It's a fascinating microcosm of the broader investment community, where different people look at the same set of facts and come to wildly different conclusions.

 

Maybe OUTR is interesting from a short-term perspective (e.g. one earnings beat causing a short squeeze and a quick pop in the stock price). But it does not seem to be the game that most here on COBF are playing.

[JayGatsby]

I think it's undervalued, so I'm in favor of the repurchases. At some point in the future they'll start doing dividends and at that point I'd rather own a higher percentage. 

 

If it traded at what I think is intrinsic value I'd sell. I'd rather that happen sooner or later, but as long as it's at the discount that i perceive it to be now, I'll keep holding. To your point, OUTR probably won't be a growth fueled compounding machine, but at the current equity yield I don't see why it can't be a compounding machine

[AzCactus]

Grey---you should have a look at Meacham's description of why OUTR is such a large position for Arlington.  While everyone maybe long/short for their own reasons I think he does a good job of highlighting the long side. 

[Picasso]

Trust me I debated that dividend versus buyback for a declining business like OUTR for like 5 pages. Abandon all hope ye who enter that debate on this thread.

 

Got it. I ignored the Coinstar thread and had a look at some of your posts there. You've expressed some of my concerns regarding the OUTR bull thesis quite well.

 

It's a fascinating microcosm of the broader investment community, where different people look at the same set of facts and come to wildly different conclusions.

 

Maybe OUTR is interesting from a short-term perspective (e.g. one earnings beat causing a short squeeze and a quick pop in the stock price). But it does not seem to be the game that most here on COBF are playing.

 

I think the OUTR longs have some good reasons to own the stock.  If it works they are going to make a ton of money.  Maybe they'll get some announcement that ecoATM is being killed off.  There's definitely some catalysts out there.

 

That said this isn't some long-term great business.  In my opinion the right way to value it is on DCF while being cognizant of the debt, not really a P/E or FCF multiple.  I was short the stock for a bit and decided I didn't want to be one of the guys steamrolled by repurchases/some weird blowout quarter so I covered at a small loss.  So far the bulls are right...

[AzCactus]

Trust me I debated that dividend versus buyback for a declining business like OUTR for like 5 pages. Abandon all hope ye who enter that debate on this thread.

 

Got it. I ignored the Coinstar thread and had a look at some of your posts there. You've expressed some of my concerns regarding the OUTR bull thesis quite well.

 

It's a fascinating microcosm of the broader investment community, where different people look at the same set of facts and come to wildly different conclusions.

 

Maybe OUTR is interesting from a short-term perspective (e.g. one earnings beat causing a short squeeze and a quick pop in the stock price). But it does not seem to be the game that most here on COBF are playing.

 

I think the OUTR longs have some good reasons to own the stock.  If it works they are going to make a ton of money.  Maybe they'll get some announcement that ecoATM is being killed off.  There's definitely some catalysts out there.

 

That said this isn't some long-term great business.  In my opinion the right way to value it is on DCF while being cognizant of the debt, not really a P/E or FCF multiple.  I was short the stock for a bit and decided I didn't want to be one of the guys steamrolled by repurchases/some weird blowout quarter so I covered at a small loss.  So far the bulls are right...

 

Agreed but this does not need to be a great long term business for it to provide an adequate return.  If the business "dies" slower than people think which has so far been the case than I think that those who are long will get  a decent return during their holding period. 

[flesh]

Can somebody provide the valuation for their bull thesis?

 

I've ran the numbers 3 or 4 different ways and it all points to:

 

1.  At 60/share, If total rental volumes decline at 10% per year, I get around a 9% cagr over 10 years with a little dividend thrown in there. There's probably some wiggle room here with future price increases, but it likely wouldn't change the cagr by more than 20%. This is based on 50% fcf buybacks, 25% dividend, 25% debt payback.

 

2. If rental volumes decline faster than 10%/year, I'd be seriously worried and I suspect others would as well.

 

3. If a new venture requires meaningful capital, watch out.

 

4. If the price comes down 20% + from 60/share, no brainer buy. If price goes up 20%+ from 60/share, no brainer sell. Assuming no future successful ventures or other meaningful changes. All about the buybacks here. Might be a good trade for a decade once or twice a year.

 

5. 2015 is a better rental year than 2014 by 50% (based on worldwide gross box office for top 20 movies actual or projected using a 3 month lag from big screen to redbox). I suspect this isn't accurate for a number or reasons such as top 20 not being representative, etc. However 50% is large. I haven't yet done the same estimate for 15' vs 16'.

 

So, are the bulls happy with 10-12%? How do you get higher without a meaningful decrease in the current share price for a year or two? Isn't brk the no brainer if one's looking for 10-12%?

 

 

 

[AzCactus]

Flesh---I would have a look at the attached letter.  The area covering OUTR is about a page and well worth the read. 

2014_Annual_Letter_.pdf

[JayGatsby]

Can somebody provide the valuation for their bull thesis?

I look at it as a sum of the parts:

1. Ecoatm - $0

2. Coinstar - EBITDA is something like $100M. There's probably some secular decline here, but I think given the cash flow characteristics a 7x multiple is probably fair. It also has that little gift card exchange embedded in it which may or may not have growth.

3. Redbox - When you back out coinstar that leaves Redbox valued at ~3x EBITDA, or ~5x after-tax operating income. That implies a fairly steep decline rate. I think the runway will be longer than implied by the valuation. So why do people use Redbox today? It's some combination of i) a price advantage, ii) a preference for DVDs, and iii) lack of access to other means of watching movies. Technologically I don't think a significantly better alternative (from a picture/sound) perspective to discs will come about so that makes ii and iii pretty similar because the risk is VOD / OnDemand. VOD has been around for 15 years and was said to be a threat when Blockbuster IPO'd. High speed internet penetration will improve but I don't think technological change causes a rapidly melting ice cube. Set top boxes (AppleTV, Chromecast) etc probably make it a bit easier to stream a movie, but paid TV penetration rates are really high (i think ~85% of households) so my guess is those people have had access to VOD. So that leaves me with price being the #1 factor, which I think is fair and is a sustained competitive advantage. The studios dictate the price that is charged for VOD, but the price RedBox charges is really governed by the retail price (at one point Redbox was buying at walmart). So the only threat to Redbox's main competitive advantage is the studios stop selling DVDs at retail which I'm not too concerned about. I also think there's net upside here because VOD rates haven't changed in years. I remember paying $5 - $6 for a movie 15 years ago. There's also the older demographic that isn't tech savvy and prefers disks, there's the ~17% of sales that are Blu-Ray, there's the households that don't have internet / paid TV, and then theres the ~3% of sales that's video games. Add all of that together and I think the fears of it going away are overblown. Personally, the thing I like best about Redbox is it's a per day charge and AppleTV only gives me 24 hours. Netflix streaming has definitely had an impact as people consume more content through that, but they don't have an overlapping selection. I hear a lot of comparisons to Blockbuster, but I don't see how the two are comparable other than they rent movies. Blockbuster had high leases expense to deal with and really was put out of business by Redbox offering the same product cheaper, not some new technology.

 

I could be happy with 10%. I think the risks are already priced in, so not too worried about long-term loss here.

 

Basically what mecham said, but he articulated it better.

 

I also think there's an element of countercyclality. In a down economy people will cut back on entertainment expenses. Redbox is some of the cheapest paid entertainment available.

 

[ritrading]

Flesh---I would have a look at the attached letter.  The area covering OUTR is about a page and well worth the read.

 

I liked what he wrote. I'll be researching the other companies mentioned in there.

[frommi]

1.  At 60/share, If total rental volumes decline at 10% per year, I get around a 9% cagr over 10 years with a little dividend thrown in there. There's probably some wiggle room here with future price increases, but it likely wouldn't change the cagr by more than 20%. This is based on 50% fcf buybacks, 25% dividend, 25% debt payback.

 

2. If rental volumes decline faster than 10%/year, I'd be seriously worried and I suspect others would as well.

 

1.) I have value per share at ~80$ if they immediately shut down ecoATM, stop paying the dividend and only buy back stock below that level. So 10-15% CAGR from the current level, but its unrealistic that they do these steps. The big question mark are the capital allocation skills of the new CEO, and since he is totally unproven i stay away.

2.) Rental volume declines last quarter were already >10%.

3.) Ken Fisher sold out.

[rkluwer]

Park West Asset Management LLC increasing there holding from the SC-13 filling, now reporting 825 mio shares, arround 5% of the total amount. (the 1,9 mio seems like its added with the call-options also reportet in the sec-3 filling, http://d1lge852tjjqow.cloudfront.net/CIK-0000941604/0e098bd1-5359-41d9-81b2-b143796acf5c.pdf?noexit=true)

 

http://d1lge852tjjqow.cloudfront.net/CIK-0000941604/d1c66ad2-dedd-4a81-baef-be2642ad8b27.pdf?noexit=true

if im not mistaking this sec filling.

 

Looking af the Yahoo finance holders log, the stand only at 3,45% 30 july. The most really believe in it, and are starting to grab stocks - hopefully to push out shorts together with outerwall's own buying. The stock option's reported, can anyone find out WHO the entered that agrement with or how i should read that filling ??

 

Hope u Guys can help.

 

.

[Guest Grey512]

3.) Ken Fisher sold out.

 

Who cares what Ken Fisher (or whoever else) thinks about OUTR?

1. Ken Fisher is a fund-proliferating, self-promoting, B/C kind of a value manager, and 2. Unless the fund selling out of OUTR is the kind of fund that purely specializes in kiosk/vending machine investments or is known to have bet a huge proportion of their fund or net worth on OUTR (like Lampert did on Sears), then why do we care about Ken Fisher selling?

 

[frommi]

3.) Ken Fisher sold out.

 

Who cares what Ken Fisher (or whoever else) thinks about OUTR?

1. Ken Fisher is a fund-proliferating, self-promoting, B/C kind of a value manager, and 2. Unless the fund selling out of OUTR is the kind of fund that purely specializes in kiosk/vending machine investments or is known to have bet a huge proportion of their fund or net worth on OUTR (like Lampert did on Sears), then why do we care about Ken Fisher selling?

 

If you don't care, feel free to ignore my post.

[ratiman]

This may be a stupid question, but why aren't Redbox videos disposable? Would it be possible to make a disposable DVD that only worked for 48 hours or one viewing?

[TwoCitiesCapital]

TBH - My valuation of redbox is has generally fallen between $80-$100 per current share, though obviously this isn't static. Each year as the share count shrinks, the target value can move upwards.

 

That being said, what I find most attractive about OUTR is not so much the actual compound return, but that the compound return will likely be uncorrelated to the market return. I've been absolutely terrified of the valuations in the U.S. Historically high multiples on top of historically high margins seems like an obvious combination for terrible long-term returns and investor disappointment. And we have a powder keg of lower earnings, slowing China, lower liquidity, potential rate hiking cycle, and a possible recession where any single one of those things going off could spell the end to the rally.

 

I rather like having a stock that I estimate may earn 8-10% per year and whose return will accelerate if it participates in a massive market sell-off. Also, knowing there's a constant bid for a large % of the shares backed by relatively stable cash flows suggests to me that it would fall less than the general market giving me increased confidence in allocating a larger % of my cash to it.

 

The problem is that most companies only do buybacks when times are good and the stock reflects the good times. Few have the flexibility to do buybacks when times are bad and a real deal can be had. OUTR likely will be able to and that's part of the reason I view the 8-10% return scenario so favorably. 8-10% is my base case. In an environment where every other stock would do terribly, OUTR's 8-10% return figure will actually grow significantly.

 

 

[widenthemoat]

TBH - My valuation of redbox is has generally fallen between $80-$100 per current share, though obviously this isn't static. Each year as the share count shrinks, the target value can move upwards.

 

That being said, what I find most attractive about OUTR is not so much the actual compound return, but that the compound return will likely be uncorrelated to the market return. I've been absolutely terrified of the valuations in the U.S. Historically high multiples on top of historically high margins seems like an obvious combination for terrible long-term returns and investor disappointment. And we have a powder keg of lower earnings, slowing China, lower liquidity, potential rate hiking cycle, and a possible recession where any single one of those things going off could spell the end to the rally.

 

I rather like having a stock that I estimate may earn 8-10% per year and whose return will accelerate if it participates in a massive market sell-off. Also, knowing there's a constant bid for a large % of the shares backed by relatively stable cash flows suggests to me that it would fall less than the general market giving me increased confidence in allocating a larger % of my cash to it.

 

The problem is that most companies only do buybacks when times are good and the stock reflects the good times. Few have the flexibility to do buybacks when times are bad and a real deal can be had. OUTR likely will be able to and that's part of the reason I view the 8-10% return scenario so favorably. 8-10% is my base case. In an environment where every other stock would do terribly, OUTR's 8-10% return figure will actually grow significantly.

 

 

 

I really think this is fantastic reasoning. The attraction to OUTR for me is first and foremost the limited downside. As long as the Redbox doesn't fall off a cliff and management stays reasonably committed to returning capital to shareholders your investment should be protected. Whether either of these things will happen is up for you to decide...but in the event of a significant market drop you will do quite well in the long run all else equal.

[DTEJD1997]

This may be a stupid question, but why aren't Redbox videos disposable? Would it be possible to make a disposable DVD that only worked for 48 hours or one viewing?

 

Years ago there was something like this at Best Buy.

 

The technology was that once exposed to air, the disc could no longer reliably be played after 48 to 72 hours...something like that.

 

People didn't like that.  It was a HUGE flop.

 

Another problem was that the cost was simply too high.  I think it was like $10?  So why not spend a little bit more and get a permanent disc?